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What your business needs to put in place if it wants to be agile, fast, and digital

by David Hamilton, Christopher Paquette

Executives are ready to roll up their sleeves and start doing the heavy lifting required to pull off a digital transformation. Our colleague, Paul Willmott, recently captured this idea in his LinkedIn blog quoting a CEO he spoke with at Davos. “Last year at Davos, digital was all about hype,” he said. “This year it's all about getting practical.”

We agree. But the next question is “how?” At a recent roundtable we held, the main concern of panelists was figuring out the mechanics of how to translate a digital transformation into the daily work of the company. Where should resources go? Where should I focus my energies? What new capabilities do we need? How do we do this? Those are just some of the questions I heard. They’re the right questions to ask.

The fundamental answer, we believe, is to start by creating a “next-generation” operating model that has the speed, precision, and flexibility to unlock value by improving both customer experience journeys and internal processes.

We tell clients to start with four building blocks to create an operating model that fits the need of the digital business. But we shouldn’t think of them as fixed rules. The digital age rewards flexibility and iteration, so when we talk about putting these building blocks in place that should be done in a flexible way. As we explain in our article, “How to start building a next-generation operating model,” each building block should be tested continually and modified to evolve along with the model itself.

Here are the big four:

Building Block #1: Autonomous and cross-functional teams

Next-generation operating models run on cross-functional teams that bring the right combination of skills together and have permission to do what’s needed to get the job done. Many insurers, for example, are building new claims teams that include lawyers, nurses and other subject-matter experts so that they get additional perspectives when they are doing their work. These teams also work closely with the technology experts to design the digital tools and processes to maximize underwriting accuracy and efficiency. In any field, you should think broadly about how teams are configured and be willing to experiment with team configurations to adapt to changing customer needs.

Building Block #2: Flexible IT resources

It’s obvious, but don’t underestimate the adjustment that your tech team needs to make. IT is morphing from a support function to the means of production for digital business models. The IT infrastructure must be modular and flexible to provide efficient and cost-effective solutions and must be capable of developing new applications or modifications rapidly. You can no longer toss technology problems over the transom and tell the IT exerts to solve them. Technology teams must collaborate with business leaders to understand how IT can enable new ways of doing business and create new sources of revenue. Company leaders should understand how the “DevOps” process for rapidly building, testing, and releasing software and infrastructure improvements works. Then they can assemble the combination of people, process, and technology to enable the DevOps approach to succeed—in IT and in other parts of the business.

Building Block #3: A rapid-response management system

Next-generation operating models are also about learning, testing, and experimenting. This means you need an approach to managing that reflects this point of view. The emphasis, therefore, is on using data to make decisions and making them quickly. You need mechanisms for rapid feedback between the front line, back-office operations, and product teams to make sure the right information reaches decision makers. To make this possible, companies are building business intelligence systems to harvest the flood of data generated in day-to-day activities and creating user-friendly management dashboards and reports, some of them capable of capturing activity in real time. Performance management, too, is becoming much more real time, with daily and weekly data to guide decisions about talent and roles.

Building Block #4: An agile, customer-centric culture

As they say, culture eats strategy for breakfast and strategies based on digital transformation have almost zero chance of success without cultural change, too. The right culture will enable the flexibility, speed, and risk-taking that are needed to succeed when digitization is rewriting business rules every day. So, for example, companies can no longer approach product launches as finite processes. Today, you can’t hold off until products are perfect to catch the market. Companies need to deliver products, then, learn quickly from customer experience, and make necessary changes. Top leaders have to embrace this kind of flexibility and model the right behavior to make an agile culture a reality. The most powerful thing leaders can do is to demonstrate with their actions and decisions that experimentation and rapid iteration—and even the occasional belly flop—are all part of the game. At one asset-management company, the top team signaled that they meant business when they jettisoned the old budgeting process and pushed executives aggressively to capture more value. Now in budget reviews they redistribute allocations to the most successful and high-value experiments. You can bet that managers know what they need to do to get their money.

So, these days the watchword for digital transformation is “how.” That’s what the operating model is all about—the processes, structures, and ways of working that are needed for a company to deliver on the strategy and operate smoothly. Remaking your operating model to support your digital transformation begins with assembling these building blocks. After that, be prepared for experimentation, revision, and lots more change.

This post is based on a fuller McKinsey piece on this topic: “How to start building your next-generation operating model.”

David Hamilton is an associate partner in our Detroit office. Christopher Paquette is a partner in our Chicago office.